Customer Retention 101: Grow Your Business by Selling More to Current Customers

You’ve heard it time and time again. It’s cheaper to get current customers to make a repeat purchase than it is to find new customers. It’s true for many businesses, especially in the crowded ecommerce arena where clicks and conversions always seem to be increasing in cost.

When was the last time you made an effort to re-engage customers to get them to come back? If you've yet to market to current customers after the sale, now is a good time to build a cohesive strategy for customer retention. Let's look at how to get started.

What is customer retention?

Customer retention is the collection of activities a business uses to increase the number of repeat customers and to increase the profitability of each existing customer.

Customer retention strategies enable you to both provide and extract more value from your existing customer base. You want to ensure the customers you worked so hard to acquire stay with you, have a great customer experience, and continue to get value from your products.

In short, acquisition creates a foundation of customers while your retention strategy is how you build customer relationships and maximize revenue for each one. But how much time and resources should you devote to your retention program? The answer to that depends on your store.

When to focus on customer retention

Whether you should focus more on customer acquisition or retention is heavily influenced by where your store is in its lifecycle. A store that started yesterday is vastly different than one that’s been up and running for many years.

Take a look at the timeline below for general guidance on your store’s potential investment levels.

1. Just starting: When you’ve just started your store there is one thing you should be focused on: getting customers. At this point your acquisition efforts should completely trump retention. Focus on strategies and tactics that will help you grow your customer base.

2. Gaining traction: You now have customers and you are getting sporadic sales. At this stage you can begin to introduce retention elements to encourage each customer to buy more. My recommendation would be to start with retention email campaigns that focus on encouraging a past customer to purchase from you again.

3. Consistent: You aren’t quite an ecommerce juggernaut, but sales are growing. This is the point where you should begin to think about mixing in more retention with your acquisition efforts. You can look at starting a referral and/or a loyalty program as well as getting more serious with marketing automation.

Your retention strategy is how you maximize the profitability of each customer.

4. Established: You are now an established ecommerce store. A common problem for retailers of this size is finding ways to continue to grow. Acquisition may be leading to a lot of one time purchases, but a retention strategy can get customers to buy more often which increases their lifetime value. At this stage, you should be serious and deliberate about your retention efforts.

5. Well-established: At this stage your store has made it past the initial gauntlet. You’ve achieved many early successes and you have a lot of processes and automations in place. Now is the time to focus heavily on retention.

For example, in the graph below, each store has 100 customers buying a $10 item each month. The light purple store is retaining 5% of those customers each month, and the dark purple is retaining 10%. As you can see the 5% increase can lead to rapid growth that is difficult to match with straight acquisition.

Aside from the current stage your store is in, you'll also want to tailor your strategy based on what you sell.

How retention fits your business

What you sell has a huge impact on which strategy you should focus on. A retailer selling high-end leather furniture is going to be categorically different than a store selling tea and coffee.

A store whose customers purchase high value items frequently will have the highest customer lifetime value (CLV). These are the types of stores that have the most to gain from a solid retention strategy.

In general, as you move to the right across this matrix you should start focusing more and more on retention. But remember, you should never ignore one or the other. It's about finding a balance that makes the most sense for your business.

The customer retention metrics that matter

The key to improving your customer retention rate is understanding the underlying metrics. But what are these metrics? How do you measure them? More importantly, how do you improve them?

Answering these questions will equip you with the tools you need to build a customer retention strategy that has a significant and lasting impact on your store’s profitability. In order to do that, let’s look at three of the most important customer retention metrics and examine why they matter.

1. Repeat customer rate

Repeat customer rate is the backbone of customer retention. It measures the percentage of customers willing to make a second purchase from you. Measuring your repeat purchase rate is an excellent way of evaluating how well your retention strategy is actually working. The higher this metric is, the more willing customers are to return to your store.

How to calculate repeat customer rate

When it comes to measuring retention metrics, it’s easy to get lost in a sea of complicated calculations. Thankfully, calculating your repeat customer rate is fairly straightforward and only requires two pieces of information:

A. Number of customers with more than one purchase

This refers to the number of customers who have made more than one purchase in a specific period of time. I recommend looking at an entire year to see the big picture.

B. Number of unique customers

This is the number of different customers that purchased from your store in a distinct time frame. Note that this is different from number of orders.

Fortunately, this is calculated for you in your Shopify reports. Should you want to do this manually, all you need to do is divide the number of customers with more than one purchase by the number of unique customers.

When you write out this equation, it looks like this:

# of Customers That Purchased More Than Once / # Unique Customers

2. Purchase frequency

Purchase frequency shows you how often customers are coming back to buy from your store. This is especially important when you consider that repeat customers are responsible for 40% of the average store’s annual revenue.

How to calculate purchase frequency

Calculating your store’s purchase frequency is similar to calculating repeat purchase rate. Using the same time frame you chose for your repeat purchase rate (e.g., a single month), divide your store’s total number of orders by the number of unique customers.

When you write out this equation, it looks like this:

# of Orders Placed / # Unique Customers

3. Average Order Value

Once you understand repeat purchase rate and purchase frequency, it’s time to maximize how much each of those purchases are worth. This metric is known as average order value, and refers to the amount of money a customer spends in your store on each transaction.

How to calculate Average Order Value

Just like purchase frequency, your average order value should be calculated using the same time frame you set for your repeat purchase rate. From there, all you have to do is divide your yearly revenue by the number of orders your store processed. Shopify reports also calculates this number for you.

When you write out this equation, it looks like this:

Total Revenue Earned / # Orders Placed

Customer value: The big picture of retention

Whether you hope to increase these metrics one at a time or simultaneously, the ultimate goal of retention marketing is to increase customer value. Customer value is the final piece of the puzzle because it helps you understand how much each customer is actually worth.

In order to calculate it, you need to already have a handle on your purchase frequency and average order value. By multiplying these two values together, you can truly see the fruits of your labor and understand the power of retention marketing.

Customer Value = Purchase Frequency x Average Order Value

Now is the best time to create a customer retention strategy to see how improving each of these metrics can help grow your business.

Strategies to boost customer retention

We’ve explored why developing a strategy to retain our current customers can be just as valuable as finding ways to acquire new ones. We've also looked at what we should measure in order to stay on track. Now, let's outline some tangible ideas you can apply to improve customer retention.

1. Use customer accounts

Customer accounts can be a double-edged sword. On one hand, accounts can make repurchasing easier by giving customers instant access to previous orders as well as pre-filled shipping information. On the other hand, customer accounts are often seen as too big of a commitment for new customers.

Because of this, many people choose to checkout as a guest if given the option. So how can you effectively implement and encourage customer accounts while not hindering conversions of first time customers?

The trick is to provide the option to create an account after the first order has been placed.

If you're on Shopify and your customer accounts are optional, you can send customers direct invitations to encourage them to activate an account after they’ve completed a purchase.

2. Improve your customer support

Support systems help you effectively communicate with your customers and provide them with the right level of support. A support system can help both pre- and post-sale by enabling you, or a customer service rep, to clearly communicate with the customer.

Having a live chat or help desk tool available can turn a customer question into a sale or a customer complaint into a resolution, whether they come in on site, through email, or via social media. Very often, an effectively resolved complaint or problem can turn an unhappy customer into a loyal, repeat customer. And that's to say nothing of the value of customer feedback, which can help you improve your products and your overall shopping experience.

Data suggests that while delight has its place, customers see fast, friendly, and consistent customer service as the gold standard. If you help customers avoid problems and get the most out of your products, you’ll be doing both of you a favor.

Depending on your niche, product mix, and margins, sending a small gift to your best customers can be a great way to remind them to return while adding the element of surprise and delight, which can increase customer satisfaction. Giving an unexpected gift also plays to the law of reciprocity, which refers to our tendency to respond to a positive action with another positive action.

Delight has its place. However, customers see fast, friendly, and consistent service as the gold standard.

For example, in a world where everything is instant and done over the internet, sometimes people just want a change of pace. A handwritten thank-you note is a thoughtful way to show customers you care and can encourage them to come back and purchase from you again.

When something is handwritten, it shows your customer you’ve taken the time to address them personally. This attention to detail will help you stand out from the deluge of automated receipts and one-size-fits-all order confirmation emails. These considerations go a long way and can potentially create a loyal customer for life.

3. Start a customer loyalty program

Loyalty programs, sometimes referred to a customer retention program, are an effective way to increase purchase frequency because they motivate customers to purchase more often in order to earn valuable rewards.

This becomes a profitable exchange for both you and your customers: they get more value each time they shop, and you benefit from their repeat business.

You can encourage customers to continue investing in the program by giving them welcome points when they create an account. When they see how easy it is to earn rewards, they’ll be excited to come back to your store to do it again.

Creating a loyalty program can be as simple as rewarding customers on their second purchase, or after a set dollar figure. Your store reports make it easy to see who your best customers are by dollar value and total number of orders. Additionally, you can opt for automated loyalty apps which can reward your customers for a variety of actions they take in your store.

4. Send engaging emails to customers

If purchase frequency is the backbone of customer retention, email marketing is the backbone of customer engagement and your retention toolkit.

Emails give you the opportunity to continue building a relationship with your customers before and after their initial purchase. It’s critical that each message you send adds value to your customer’s experience. If it doesn’t, you run the risk of losing them.

Shopify data from Black Friday Cyber Monday also shows that, relative to other sources, email has the highest conversion rate at 4.29%, followed by search in second. It's clear email is a channel that converts.

A great way to get started is with follow-up emails. A week after a customer’s first purchase, send them an email that acknowledges and thanks them for buying. This type of acknowledgement helps customers feel good about their decision to buy from you, and makes your brand more approachable.

You can make this initial email even more impactful by recommending products that complement their initial purchase. Finally, you can even start including customer reviews as well. These endorsements will increase both the value of each recommended product and the customer’s desire to buy.

After this initial follow-up has been sent, you should make sure to send personalized messages regularly. Beard King does this beautifully, sending personalized emails that offer new products or sales every two to three weeks. Making additional product recommendations and sending invitations for upcoming sales and promotions for new products are great ways to keep the conversation going with first-time buyers.

If you have a product that is perishable, consumable, or otherwise needs to be refreshed over time, knowing your products’ lifespan and sending well-timed emails can be the perfect way to bring back dormant customers. This tactic can be particularly effective because ideally, you’ll be delivering the right message to the right person at the right time.

For example, Luxy Hair mentions in their FAQ section that their hair extensions will last three to six months on average, or up to a year depending on wear.

Knowing this, Luxy could set up a series of automated emails to go out after three months, six months, and one year that explain to customers the benefits of a fresh set of hair extensions. These emails would help educate a first-time buyer, keep Luxy top-of-mind, and encourage repeat business, all while providing customers with a great experience.

In all of your post-sale marketing communications, remember to remind customers of why they bought from your brand in the first place. Getting them to come back rests on your ability to show them why an additional purchase is worth their time and money.

5. Offer a discount or credit to return

Generally, I would tell you to be wary of discounting. When you discount your products you enter a perpetual race to the bottom that conditions customers to expect dropping prices, which ultimately results in a loss of revenue for your store. When margins are tight, discounting is even more of a risk.

However, when discounts are sent to a first time buyer I actually love it! Sending a discount code for their next purchase with a first time order is a great way to nudge them to come back. For this reason, discounting can also be an effective way to bring back customers that haven’t purchased in a while.

You can strengthen that nudge by giving them more than the standard 10% off. Giving 20%+ is more motivating and according to Market Wired, once a customer comes back for a second purchase they have a 54% chance of doing so again. When you think of that 20% off as an investment in boosting your repeat customer rate, it sounds a lot more reasonable.

You may also want to experiment with offering credits to use at your store (i.e. $10 towards any purchase) versus a percentage discount (i.e. 10% off any purchase).